DeFi and NFTs have undoubtedly revolutionized the crypto world in the past few years. NFTs have become a hot topic these days but more use cases pop up every day. NFTs are representations of ownership of equities and assets such as artworks, collectibles, and in-game assets within the most popular blockchain games. These NFTs possess the ability to store complex information about the spoken assets.
Lately, NFTs are becoming strong financial tools within the DeFi ecosystem. NFTs can represent complex contractual agreements in the world of finance such as one’s right to withdraw funds from DeFi protocols. As a team dedicated to building the next generation of DeFi protocol, we are very excited to incorporate the use of NFTs in DeFi. The future DeFi platforms will embrace NFTs, instead of ERC20 tokens, for certifying asset ownership.
But why are these NFTs being used to represent asset ownership?
One of the very first protocols to integrate NFTs for liquidity positions is Uniswap V3. While Uniswap V2 uses ERC20 tokens for their LP positions, Uniswap V3 uses Non-Fungible liquidity. This enhancement from Fungible Liquidity Pool to Non-Fungible Liquidity Pool is one of the great innovations from Uniswap V3. The advantage of these NFT based liquidity positions is endless as they provide better customizable options.
Let us take a close look at why Uniswap adopted Non-Fungible Liquidity Pools over Fungible ones.
Uniswap V2’s liquidity is distributed evenly across an x * y = k price range. When Uniswap incorporated concentrated liquidity positions with custom price ranges, non-fungible liquidity pools provide better fund utilization. These Non-Fungible Liquidity pools are more customizable and can represent users’ positions in a more efficient way. Since LP positions in Uniswap V3 contain more complex inputs such as concentrated liquidity, range orders, and flexible fees options, all this information is needed to be stored in form of NFTs.
The reason why UniLend decided to opt for NFTs for our liquidity pools is the inability of ERC20 tokens to implement complex functionalities for advanced financial instruments.
UniLend’s Non-Fungible Liquidity Pools
UniLend Omnis implements NFTs as certificates for equities. Lenders on UniLend Omnis will receive an NFT to represent their right to withdraw funds from the pool. The descriptive nature of NFTs is better suited to manage higher dimension variables associated with lending and borrowing such as maturity, interest rate, liquidation, etc.
NFTs on UniLend Omnis will store multiple data points including the token addresses, lending & borrowing balances of the digital assets in an isolated dual asset pool. In Omnis, both lenders and borrowers will receive their liquidity position in the form of non-fungible tokens. These NFTs will determine users’ positions in the pool and are transferable should users decide to trade their positions in secondary markets.
The above image is a representation of a non-fungible liquidity position in the DOGE-SHIB pool.
Over a period of time, many sophisticated DeFi strategies can be implemented using these tokenized LP positions. The potential to open a money market for tokenized liquidity positions is vast.
DeFi is moving towards NFTization where advanced financial instruments will be represented in the form of NFTs and the motivation to do so is a simple one; the ability of NFTs to store highly complex data provides better fund utilization and enhanced user experience.
As NFTs become cardinal in DeFi, protocols leveraging non-fungibility pools will allow users to have a wide range of choices with asset allocation and risk mitigation.